Monday, March 30, 2009

Friday, March 27, 2009

(This started as a comment responding to Hilzoy but grew out of control, so instead of trying to post it there I'll put it here)

You can come up with a scenario to justify even the most exotic loan, particularly if you are a straight out investor. The main problem in my mind was a system that essentially forced real estate investors into fraud.

Because almost all of these products are restricted to owner-occupier borrowers. There is a perfectly good reason for that, traditionally owner-occ are less willing to default and more likely to take actions that preserve the value of the property. So you can't blame the underwriters.

On the other hands the rates for making a commercial loan to buy residential investment property were much higher than an owner-occ loan, enough higher that in many cases you couldn't make your cap rate work, you couldn't get enough cash flow from rent to cover the costs of carrying the loan without tying up all your operating capital.

Not all speculators are flat out gamblers. A lot of people made money buying houses with as little down as possible at the lowest initial rate with the full understanding that exiting the loan in the planned time frame was going to require a new round of financing with associated fees and penalties. For an investor a pre-payment penalty is just part of the cost, in effect it acts exactly like paying points does, it lowers the cost of carrying the loan, with the added advantage of coming at the back end of the total transaction, and hopefully out of the accrued equity.

The only problem is that the loans available that actually make the strategy work are technically and legally not available to the investor no matter how well capitalized he is. There is money just sitting on the table ready to pick up if you can just get someone to write you a loan. And there are or were plenty of lenders ready, willing and able to write you that loan. If you qualified for owner-occupied.

The result was predictable, real estate investors took out whole series of 'owner-occ' loans and often on multiple properties. And yes often with really exotic loan products that make about zero sense for an actual owner-occupier but work for the investor.

Sure it was fraud but in a rising market mostly though not totally a benign fraud. And absent a total freeze-up in credit there was always a way to exit even if appreciation didn't come in the way you expected, because you only lose money on the last round, and maybe not then.

But we had a total freeze-up in credit. And everyone got locked in benigh and malign fraudsters alike. Because Wall Street panicked.

Certainly there was a lot of predatory lending going on, and some people at Countrywide and Washington Mutual are right to be concerned about fooling ACTUAL owner-occupiers into buying houses too big and with too ridiculous terms for what they could afford. Some people need to do some serious jail time.

On the other hand a lot of people were just trying to make a buck buying rentals, managing those rentals for a period of time, and then selling them to a new investor. And a lot of other people were interested to selling those people loans that would pass muster with the underwriter which might require a friendly appraiser. And a certification that you actually planned to live in the house. Oops that was the catch, the obstacle that kept all parties, the seller, the buyer/investor, the lender, the appraiser, the escrow agent from sealing the deal. And people simply agreed to blink.

One last thing. There is some talk about 'liar loans', that is 'stated income/stated assets'. And a lot of this was straight out predation by lenders who might be acting without the knowledge of borrowers, while some of it was people who just wanted more house than they could realistically afford. But not all of it. Because the reason some of our clients and some of our company investments were funded by 'stated/stated' loans with a higher rate than a conventional loan was because ACTUAL assets and ACTUAL income was TOO HIGH to realistically qualify for an owner-occ loan on that particular property. If we had a wealthy out of state investor who wanted to pick up some property for us to manage it would have been kind of difficult to explain why he wanted to relocate from his mansion outside Philly to a three bedroom two bath rambler in a working class neighborhood.

My ex-company was providing a reasonable public service for a reasonable profit. We never to my knowledge put someone in a house they couldn't afford and we were a pretty decent landlord for the multiple properties we managed on our behalf and those of our investors. But in a system where the only way to get a reasonably priced loan for residential investment property is to claim you are an owner-occupier and where there is literally no one tasked to actually check, well investors are going to take the loan.

Saturday, March 14, 2009

(This piece is incomplete and may be junked altogether. But any comments/advice etc are welcome)by Bruce Webb

Much of the conceptual confusion around Social Security derives from the fact that 'crisis' is defined in (at least) four different broad categories resulting in proposed solutions that don't even meet the frame of the objector. So I propose to unpack the various versions and then discuss the ways the framing shapes the resulting rhetoric.

Crisis 1: Benefits Crisis. This holds that the problem is a gap between cost and scheduled benefits that should if possible be addressed with a fix that maintained the highest attainable benefit.

Crisis 2: Financing Crisis. This holds that the problem is a gap between promised benefits and financing that if possible should be addressed with a fix that maintains affordable financing.

Crisis 3: Socialism Crisis. This holds that the problem is that the government even addressed this issue in the first place. For example Milton Friedman believed Social Security was immoral and should be liquidated by given everyone securities in exact proportion to their past contributions and projected benefits. (That is he maintains the government obligation to the past while getting it out of the business going forward.)

Crisis 4: Pure Opportunism. This holds that the problem is actually an opportunity to make a huge amount of money by privatizing the system.

For the most part people who are motivated by Crisis 3 or 4 are not able to operate in the open. Particularly these days when most Americans are not saying 'Man if we had only allowed Wall Street to take a cut out of every Social Security dollar they wouldn't have to cut back on corporate jet purchases.' And while most Americans have been conditioned to shudder when they hear the word 'Socialism' they don't by and large associate that with the multi-colored check that shows up in their parents mailbox each month. Instead Crisis 3 and 4 people have to hide themselves behind arguments derived from Crisis 1 or 2. Which brings up the problem of sincerity. How do you positively identify people who are fundamentally being driven by Ideology (3) or Greed (4) when they are using arguments drawn from Finance (2)? Well you can't, which is why I rarely try. You can suspect or know that that your debate component is just fronting for Wall Street or alternatively the Austrian Alps, but while you can make them uncomfortable mostly you can't pin them down. Instead the debate generally resolves to Crisis 1 vs Crisis 2.

Which is where the big battle is waged. Something I will discuss under the fold.

First thing to note is that Crisis 1 and 2 are almost irreconcilable. People who believe in Crisis 2 are simply not going to be convinced by arguments that fixing Crisis 1 would be cheap because they are not committed to the concept that Crisis 1 is important. For whatever reason Crisis 2 people simply don't want to pay any more now or in the future.

Starting from the bottom with Crisis 4. Supporters of traditional social security often claim opponents are only bent on getting ahold of pretty much the only huge stream of money that they don't control. And it is a big pot, in 2007 Social Security took in $785 billion in receipts and disbursed $589 billion in benefits Table III.A3.—Operations of the Combined OASI and DI Trust Funds, Calendar Year 2007 [In millions]. Surely there are opportunities for someone to skim off hundreds of millions off the top of that huge river of cash. Well there are two complications to that. One is operational, currently Social Security operates with administration costs right under 1% of receipts and less of total costs and are servicing 10s of millions of beneficiaries. But the second is rhetorical, the people who might think they can make huge money off of retirees just can't come out and admit that in the open. Which means that people who are really motivated by Crisis 4 have to hide themselves behind Crisis 1 or 2 and promise better results at a lower cost. (A result that is in my view not really possible.) In any case these people are mostly marginalized in the debate.

As are people who are really believers in Crisis 3. The American people by and large have been conditioned to think bad things when they hear the word 'Socialism', like labor camps. They have equally been conditioned to think such things when they hear 'Government Health Care'. But by and large they don't put Social Security into the first category or Medicare into the second. I remember back in the last go around of Medicare 'reform' one woman being quoted to the effect "I don't care what the government does, as long as they keep their hands off my Medicare". In the face of that the libertarian/glibertarian camp pretty much has to fall back on arguments about the superior efficiency of private markets and line up behind Crisis 1 or 2 right with the opportunists.

Friday, March 13, 2009

Assuming that the 2009 Report uses the same file name conventions as in previous Reports the following links should go live as soon as the Report goes up. Generally the Report is issued at the end of March but there may be some delays this year do to the three vacancies among the six Trustees (there were four until Solis was confirmed yesterday).

Thursday, March 12, 2009

Well I am sorting through some graduate school notes and ran across this handwritten deal. Plus some articles illuminating (?) it. So I suppose I will preserve it for all times on the Intertubes. Make of it what you will.

1. takes Present2. took Past3. is taking Present Progressive4. was taking Past Progressive5. has taken Present Perfect6. had taken Past Perfect7. has been taking Present Perfect Progressive8. had been taking Past Perfect Progressive

tense: present tense is used for any period of time, short, long or eternal that includes or explicitly concerns the present moment. Past tense excludes the present moment.

progressivity: progressive indicates activity continuing through a period of time - activity with duration. Non-progressivity merely reports activity, without indicating it has duration (but NOT indicating that the activity does not have duration.)

perfection: perfect indicates a period of time that began before, but continued right up to a point of time (either past or present).

well back in the day I was deeply involved with issues of English grammar and their relations with such things as the Sapir/Whorf theory of language. I am not sure where the 'Aux1' and 'Aux2' came from but all of this seemed important enough at the time (late 80's) to have me keep my notes. So rather than keep them on paper here they are.

Wednesday, March 11, 2009

In comments VtCodger remarked that he had never seen the actual Bush plan for Social Security. And indeed when Bush raised the subject after the 2004 election he was careful not to push a specific plan of how own. Instead he attempted to get a consensus around 'Crisis' and get buy-in from everyone that 'Something was better than Nothing'. He did allow the Posen Plan to get floated, largely it seems because Posen was a Democrat and so allowed him some bi-partisan cover, but never explicitly endorsed it. Which was a good thing because when exposed to light it got roasted largely on the basis of 'clawback' and 'annuitization'. On which maybe more in comments.

But there was a Plan or at least a Report of the President's Commission to Strengthen Social Security (12MB) which presented three Models each meticulously scored by the Office of the Chief Actuary in fifty pages of detailed projections. And it is worth discussion. But before doing that I want to lay out some links to other plans out there. If readers know of links to others please put them in comments.

Sunday, March 08, 2009

Robert Waldmann put up a post at Stochastic Thoughts called Homeless Man with Cell Phone responding to some attempt by Andrew Malcolm to be snarky which only revealed him to be gormless. You should read the whole thing as Robert attacks a Right meme that goes back to Reagan era days, that you can't really be poor if you own a TV or eat at MacDonalds. Or in this case own a cheap cellphone. This just shows such cluelessness about the realities of poverty in America where often poor people can't afford to live cheaply. That is it is more expensive to live in a run down residential hotel than it does to live in an apartment, it can cost more to buy and maintain a series of beaters than it would to finance a nice used economy model. But sometimes you just can't get over the credit hurdle. While you can buy a $10 cell phone with pre-paid minutes and then pay as you go.

But the whole thing got me thinking about a topic I have been mulling over a while. Me from comments:

Robert someone should write a post about the paradox of communication and content in the 21st century.

I am struck when watching footage from overseas whether that be Africa or Asia that cell phones are almost ubiquitous in even the poorest neighborhoods. And while I suspect they don't have the same data plan I have in my iPhone we are not that far away from a world where remote villages and slums don't have access to secure food supplies or clean water but via a solar powered communal TV and a crank up PC have access to information from around the world.

Europe has a project to put all of its greatest cultural resources online and many government and major research libraries are committed to getting as much of their collections online as well.

Is this heaven or hell? I mean it is somewhat hellish to think of some Sudanese kid orphaned by rebels and hoping that the UN aid people will return one day still being able to wander the virtual halls of the Louvre and browse the stacks at the L of C. On the other hand I am on the verge of selling my 2 BR condo (in which I live alone) with plans to move to a small studio. Because as long as I have access to high-speed internet, a microwave, and a refrigerator my needs are pretty much met.

Part of this is a desire to get a little more green and reduce my carbon footprint, but a lot of it is because I don't need to have eight book shelves double stacked with books anymore, or a record collection, or racks of floppy drives, or boxes of pictures, and I can save a bunch of green by not having to set aside living space for such things.

Given the economy I too might end up living out of my car, but one way or another I will still have access to the internet. We seem to be entering an era where all things are flipped. Once only the wealthy could afford fine art and books and travel, these days those may all the poor can afford going forwards (admittedly the travel being virtual).

To which Robert responded

Alternative title -- "George Orwell Might Say."

Some decades ago, during the great depression, Orwell noted that poor people in his day didn't have access to necessities, but they did have access to luxuries. Said luxuries included Hollywood films and carryout junk food.

We've gotten used to the idea that people who watch actors on tv and eat in McDonald's aren't necessarily rich. Even the idiot conservatives among us will get used to the idea that people will cell phones aren't necessarily rich some time soon.

On a related note people marvel that poor people buy Lotto tickets. Don't they know the odds? Don't they have children that need better food and clothing? Well they may not really understand the odds but they know not everyone is getting rich off the lotto. When you are poor and buy a ticket what you are buying is a dream, if you are underpaid or out of work and unable to afford to take your kids to the multiplex odds are you can afford a cheap color TV for the kids even with the exorbitant monthly bills (even for basic cable) and you can take that lotto ticket and spend hours thinking what you would do with it if and when.

Yet wealthy people who think nothing of dropping a few hundred dollars on concert tickets with $15 Apple Martinis after the show all for just a couple of transient hours of entertainment begrudge the poor the ability to watch TV and dream of striking it rich.

The combination of ignorance and mean-spiritedness would be stunning. Except that this kind of "Let them eat cake" attitude has gone on forever.

Friday, March 06, 2009

by Bruce Webb(this post was originally intended for publication at Angry Bear, but I am not totally satisfied with it so will just leave it here)

Opposition to Social Security is most often expressed in terms of efficiency with assertions that ultimately it will not work at all ('bankrupt', 'dead broke') or that it will require unacceptable tradeoffs ('tax increases', 'program cuts') or that it is simply unfair burden shifting ('intergenerational inequity'). These arguments generally reduce to 'Private (or Personal) Retirement Accounts would work better'. But on examination the proposals to transition to PRAs don't actually seem to work better, not from the standpoint of individual workers. Which has led supporters of traditional Social Security to accuse opponents of being thieves dying to get ahold of the future revenue stream and/or not wanting to pay back past borrowings.

There is some justice to this charge, an appeal to the banks, insurance companies and others that would benefit from private accounts is explicitly laid out in the 1983 battle plan presented by Butler and Germanis Achieving Social Security Reform: a 'Leninist' Strategy. And a fair reading of the Liebman-MacGuineas-Samwick Non-Partisan Social Security Reform Plan (aka LMS) shows that their emphasis is first on 'sustainable solvency' which is to say putting Social Security on a new pay-go basis over the Infinite Future, secondarily 'fiscally responsible' which they define as minimizing future Fund Borrowing, thirdly on 'economically beneficial' which translates to increased national savings. But at no point if there any real emphasis on return to actual beneficiaries, all pay more and get less and all the benefits are shifted outwards and onwards.

So we cannot dismiss the profit motive OR the desire to minimize the external tax burden to finance Social Security. They are both present. But historically opposition to Social Security has been driven by deeper motives, some people led mainly by Friedman in recent decades simply believe the system is "immoral" and that arguments about efficiency and the "nuts and bolts" are just the needed tools to drain the electricity out of the Third Rail of American Politics. So below the fold I am going to give some links and quotes of people who regret we even HAVE a system of Social Retirement.

As the title suggests the foremost proponent of this view was Milton Friedman. In 1999 the rumblings of 'Reform' were getting louder as Republicans saw they were finally see a possibility of gaining control of the White House and so get past Clinton's 'Save Social Security First' and Gore's 'Lockbox'. In April of 1998 Cato published the following Briefing Paper 46 by Friedman SPEAKING THE TRUTH ABOUT SOCIAL SECURITY REFORM. Which 'truth' is summed up as follows:

A privatized SocialSecurity system should not be mandatory. The fraction of a person’s income that it is reasonable for him or her to set aside for retirement depends on that person’s circumstances and values. It makes no more sense to specify a minimum fraction for all people than to mandate a minimum fraction of income that must be spent on housing or transportation. Our general presumption is that individuals can best judge for themselves how to use their resources. The ongoing discussion about privatizing Social Security would benefit from paying more attention to fundamentals, rather than dwelling simply on nuts and bolts of privatization.

People who wish can examine the details of the Friedman plan, basically it makes implicit debt explicit and then eliminates Social Retirement altogether, he doesn't want your money and he doesn't think anyone can provide a more efficient solution than the market. And Friedman was even more blunt in the following exchange from 2005 Milton Friedman: Eliminate Social Security, Medicaid, Medicare

Friedman, Paul Snowden Russell Distinguished Service Professor Emeritus of Economics at the University of Chicago, shared his economic theories over lunch October 15 at a California restaurant with nearly two dozen alumni and students who are members of the Milton Friedman Group, the student-led organization that promotes Friedman’s free-market approach.The event gave participants a chance to pose questions that Friedman had fielded for years from critics. “If you’d abolish Social Security for everyone, what would you do with people who are indigent and incapable of taking care of themselves if they didn’t save during their younger days?” asked second-year student Andrew Van Fossen.“Social Security isn’t a program for them, it’s for everyone,” Friedman replied. “There’s a much stronger case for government having a program for them than for everybody. But if you look at the record, private charity is a much more effective way of helping people.”“If you’re going to go from where you are to where you want to go, in the process you’re going to have to have programs of that kind to do it,” Friedman continued. “That’s why, in order to get rid of Social Security, you’re going to have to have private accounts.“What you should do, in my opinion, is to give every person who now has a claim on Social Security bonds equal to the value of his claim, and set him free. Let him save. Let him do what he wants with it. That would not add a dollar to the debt we now have; it would just convert an unfunded debt into a funded debt,” Friedman said.Van Fossan asked, “If you did that, how would you protect people from making really stupid decisions?”

“I don’t!” Friedman replied. “Why should I?” a response that drew laughter from the group. “You mean freedom does not include the freedom to make a stupid decision?”

Now I would have a little quarrel with that "private charity is a much more effective way of helping people" piece, after all the guy was born in 1912 and experienced the Depression in full, but at least you can't accuse this guy of hiding behind 'intergenerational inequity' or ducking past debt.

Wednesday, March 04, 2009

Marx believed that capitalism was doomed by its inherent contradictions, and that it would inevitably collapse—to he replaced by the next stage on the ladder leading to the socialist Utopia.

Lenin also believed that capitalism was doomed by its inherent contradictions, and would inevitably collapse. But just to be on the safe side, he sought to mobilize the working class, in alliance with other key elements in political society, both to hasten the collapse and to ensimre that the result conformed with his interpretation of the proletarian state. Unlike many other socialists at the time, Lenin recognized that fundamental change is contingent both upon a movement’s ability to create a focused political coalition and upon its success in isolating and weakening its opponents.

As we contemplate basic reform of the Social Security system, we would do well to draw a few lessons from the Leninist strategy. Many critics of the present system believe, as Marx and Lenin did of capitalism, that the system’s days are numbered because of its contradictory objectives of attempting to provide both welfare and insurance. All that really needs to be done, they contend, is to point out these inherent flaws to the taxpayers and to show them that Social Security would be vastly improved if it were restructured into a predominantly private system. Convinced by the undeniable facts and logic, individuals supposedly would then rise up and demand that their representatives make the appropriate reforms.

While this may indeed happen, the public’s reaction last year against politicians who simply noted the deep problems of the system, and the absence of even a recognition of the underlying problems during this spring’s Social Security “reform,” suggest that it will be a long time before citizen indignation will cause radical change to take place. Therefore, if we are to achieve basic changes in the system, we must first prepare the political ground so that the fiasco of the last 18 months is not repeated.

First, we must recognize that there is a firm coalition behind the present Social Security system, and that this coalition has been very effective in winning political concessions for many years. Before Social Security can be reformed, we must begin to divide this coalition and cast doubt on the picture of reality it presents to the general public.

Second, we must recognize that we need more than a manifesto—even one as cogent and persuasive as that provided by Peter Ferrara. What we must do is construct a coalition around the Ferrara plan, a coalition that will gain directly from its implementation. That coalition should consist of not only those who will reap benefits from the IRA-based private system Ferrara has proposed but also the banks, insurance companies, and other institutions that will gain from providing such plans to the public.

As we construct and consolidate this coalition, we must press for modest changes in the laws and regulations designed to make private pension options more attractive, and we must expose the fundamental flaws and contradictions in the existing system. In so doing, we will strengthen the coalition for privatizing Social Security and we will weaken the coalition for retaining or expanding the current system. By approaching the problem in this way, we may be ready for the next crisis in Social Security—ready with a strong coalition for change, a weakened coalition supporting the current system, and a general public familiar with the private-sector option.

Unified surplus for the current year +$100 billion ($5.1 trillion - $5 trillion) Borrowing needs from the public +$0 ($4.9 trillion income tax + $1 billion FICA cash surplus - S5 trillion general fund spending) Total public debt -$200 trillion ($10 trillion rolled over + $100 billion in Special Treasuries for the cash surplus + $100 billion in Special Treasuries for the interest accrued)

After: Total Public Debt $10.2 trillionDebt held by the public $6 trillion Total Intragovernmental holdings $4.2 trillion(which includes SS Trust Fund $2.2 trillion)

In this scenario the General Fund is running a mild deficit of $100 billion totally financed by the cash surplus from FICA. From the perspective of the bond market the budget is balanced with only existing maturing debt needing to be refinanced. On the other hand the Unified Surplus/Deficit scores at +$100 billion because interest is included as revenue even though not financed out of the public markets. Leaving total public debt up +$200 billion. So it is simple! General Fund in deficit by $100 billion, Unified Budget in surplus by $100 billion, Social Security Trust Fund in surplus by $200 billion, Public Debt in deficit by $200 billion. Net borrowing needs $0.